Market Place; Disclosure Is Now Name Of the Game For More Banks

By RIVA D. ATLAS

Published: February 21, 2002

Executives at many companies are telling analysts and investors to expect more detailed disclosures in their year-end filings with the Securities and Exchange Commission.

A host of companies from Krispy Kreme Doughnuts to General Electric to I.B.M. have indicated that they will be disclosing more about their finances. The moves are in response to investor uneasiness after the Enron collapse and to S.E.C. guidance last month about what it expects to be in the latest crop of annual reports, most of which will be filed in the next few weeks.

But finance companies, including commercial banks, will snare much of the spotlight because of the nature of their business, which involves trades, loans and other dealings on behalf of third parties.

Commercial banks are also trying to shore up sagging stock prices and to respond to recent Federal Reserve signals that it will be examining their special-purpose entities more closely, as it did recently with PNC Financial Services.

Most banks are not expected to take write-downs for off-balance-sheet financings, said H. Rodgin Cohen, a top banking lawyer who is chairman of Sullivan & Cromwell, but ''you are going to see additional disclosure.''

J. P. Morgan Chase, for example, has been under scrutiny because of its relationship to Enron and its stock has declined 19 percent this year. Now it plans to provide additional information, in annual reports and quarterly filings.

All the special-purpose vehicles that the bank is involved with ''are already reflected on our balance sheet in one way or another,'' she said. ''What's different is we plan to identify the specific amounts.''

SunTrust Banks plans to provide additional information in its annual report about special-purpose entities, too. At a January conference, its chief executive, L. Phillip Humann, said the bank had set up a special-purpose entity with $2.2 billion in assets. The company has another entity, with $200 million in assets, said Gary Peacock, head of investor relations at the Atlanta bank.

Investors, not regulators, are the motivating force, Mr. Peacock said. ''What we've decided is that in the brave new world we're in, it's better to provide more disclosure,'' he said.

General Electric, moving to shore up investor confidence after a 6 percent decline in its stock price this year, said this week that it would disclose more in its annual report next month about its giant GE Capital unit, among others. To some investors, G.E. is taking a long overdue step to bring the disclosure of its financial business closer to the more detailed information already provided by big financial institutions.

Investors who bet against stocks see some opportunities. It will take some time for analysts and investors to digest the additional information.

''The 10k's are going to make interesting reading,'' said Herbert Denton, president of Providence Capital, an investment firm. He said his firm just bet on a decline in I.B.M. stock. I.B.M. acknowledged last week that it had used a sale of a business at the end of last year to offset general expenses and said it would provide more detailed accounting in future filings. Providence is betting that I.B.M. is ''the tip of the iceberg, we think, or could be,'' Mr. Denton said.

For investors, this raises the prospect of additional volatility. ''I am quite concerned that additional disclosures in annual reports and increased scrutiny from auditors and regulators increase the chances of negative surprises for investors,'' said James Ellman, portfolio manager for the Merrill Lynch Global Financial Services Fund.

In its statement last month, the S.E.C. recommended that companies make sure to describe ''liquidity and capital resources, including off-balance-sheet arrangements'' in their annual reports.

The Fed, which oversees bank holding companies, wants to maintain confidence in the banking system. ''The Federal Reserve reserves the right to apply its own sound interpretation of those accounting principles based on a careful consideration of the underlying facts and circumstances and the economic substance of the transactions,'' said Mark Olson, a member of the Fed's board of governors, in a speech on Feb. 7 at the University of Miami School of Law.

PNC shareholders were surprised late last month when the company said its 2001 profit would be reduced by 27 percent, or $155 million, after the Fed questioned how the company accounted for underperforming loans and venture capital assets. PNC sold these assets to special-purpose entities, in which it retained a part-interest. The Fed told the bank it should carry the stakes on its balance sheet, and the bank agreed to change its accounting.

''Banks will have to go along with what the auditors and regulators tell them to do in this environment,'' Mr. Ellman said. ''PNC decided it was better off taking the pain than getting into an argument with the regulators.''

Much of the off-balance-sheet financings by banks relate to consumer finance, including credit card receivables and mortgage loans, said Mr. Cohen, the banking lawyer. Banks tend to securitize, or bundle together the credit they extend to consumers, and sell these bundles as asset-backed securities to investors.

''The vast majority of special-purpose entities are used by banks for very legitimate purposes,'' Mr. Cohen said. ''Banks can't afford to hold these loans directly on their balance sheets. If they were forced to do so, there could be a significant contraction in consumer credit.''

J. P. Morgan's customers have approximately $20 billion in credit card receivables outstanding, which have been bundled and sold to investors, Ms. Dublon said. This figure is already disclosed in the statement of operating income, she said, but now the bank will provide specific data about other securitizations, including auto and mortgage financings.

J. P. Morgan has set up special-purpose entities on behalf of its clients, in part to enable companies to finance themselves more cheaply. In some of these entities, the bank buys a company's receivables. This allows the entity to raise money at lower rates in the commercial paper market than the corporate client would be able to do otherwise.

Ms. Dublon and other bank executives said they were anticipating lots of questions from investors puzzled by the additional detailed information. ''What the S.E.C. is trying to do is increase transparency,'' she said. Still, ''I do think that in this environment you run the risk that it gets out there with the wrong headline.''